Category Archives: Government Policy

As the CEO of ClearlySo I get invited to join committees to “foster impact investment”, or such-like. These committees are normally chock full of well-intentioned, intelligent and experienced professionals and are invariably interesting. Inevitably, one of the recommendations always seems to be to collectively ask the Government to “do more”, which usually means funds, grants, or tax credits, or some series of goodies from the Treasury.

There is no doubt that the funding provided by successive governments has helped enable the impact investment sector here to become the most diverse, innovative and developed in the world. But enough is enough. In fiscally constrained times it feels indecent to ask for more. ClearlySo has routinely opposed impact investment tax credits in particular, because they generally benefit wealthy investors, which feels inappropriate.

But the tax system is a very powerful policy tool, so recently at one of these committees I did make a recommendation to utilise this tool in a fiscally neutral fashion to encourage more positive impact, and simultaneously discourage negative impact. It is what I call “fiscal tilting”, and I have been writing about it for years. Its premise is this: tax things we want less of and shift those revenues (or a portion thereof) to things we want. As the Meerkat says, “simples”.

Organisations creating negative externalities (e.g. pollution) would have to pay, and the funds would be recycled to entities generating positive externalities, creating a new source of income for charities and high-impact enterprises that are currently doing their good work “for free”.

In fact, such a change would probably be revenue-positive as government would need to spend less because charities and others would do more, and firms would generate less mess for taxpayers to clean up. Capital markets would respond to these policy changes and amplify the effects by further penalising firms which did bad things and favouring those doing good.

Whilst some were supportive, other colleagues seemed nervous. “What exactly would you tax?” “Who would decide how it was spent?” The truth is that I had no idea, but figuring out what we want more or less of, as a society, does not seem beyond the realm of human intelligence.

I do not know how such a system would work perfectly, but our current tax system is a shamble. Surely an experiment is worthwhile—I feared that a search for the excellent was threatening the good. On reflection, I think it may be that or worse. My sense is that radical change is threatening. We operate in existing systems and normally they work especially well for people like me on such committees. We will fight hard for a bigger slice of the pie, but question how it is baked or if we should be having pie at all and there is deep unease.

Simple ideas (e.g. the “Tobin” tax, a basic income) are derided as overly simplistic. The proposers are overwhelmed with objections and inundated with technicalities. In my view, let’s first decide if an idea has merit and then, if we believe it might, try it out in a small way (as Finland is doing with the latter). The fact that things as they are work poorly means our downside risk is limited.

However, this is not how things work, so in the spirit of moving things along, let me offer a specific (and very rough) proposal.

We manufacture far too much stuff and the strain on our natural resources is irrefutably unsustainable. So, let us tax physical “stuff” by weight. I would only exempt residential homes and food as well.

Let’s raise £1 billion. Any less, it’s not worth the bother. The tax you pay is the weight of stuff you sell, divided by the amount of stuff bought in the economy, times £1 billion.

The money is used to help eliminate homelessness and provide those without homes with food and shelter.

In mid-April, it was announced that Australia’s Macquarie Bank had acquired the Green Investment Bank (GIB) in the UK for £2.3 billion. The GIB was launched in the UK, under the Conservative-Liberal Democrat coalition in 2012, to facilitate a marketplace for renewable energy investment in the UK. It was an initiative designed to fill a state funding gap for tackling climate change by attracting private funds to finance investments related to environmental protection and improvement.

Following the announcement, there was some concern in the marketplace that the new owner would asset-strip the GIB and that their intentions were far from the more noble aspirations of the Coalition Government. Historically Macquarie has not been noted for its green credentials. Only time will tell.

The UK has an honourable history in developing government-backed initiatives to kick-start markets considered important for a variety of reasons. The listed venture capital firm, 3i, was originally started as the Industrial and Commercial Finance Corporation (ICFC) in 1945 to provide badly needed long-term funding in the post-war environment. The concept was to foster the development of a market for entrepreneurial businesses in the UK and it became the first, and, for many years, the dominant VC firm in the UK market. Its original stakes were owned by the major UK banks as well as the Bank of England and after a merger and several re-branding exercises, it floated in 1994. After the business was listed all the banks gradually sold off their stakes.

The Commonwealth (formerly Colonial) Development Corporation (now CDC) was also begun by government initiative. It was founded in 1948 by the Atlee Government with the mission of fostering business development in the former British Empire, starting with agriculture. It has gone through many iterations, re-brandings and restructurings over the years, but like 3i and the GIB, it has a core mission which is not, and was not meant to be, solely about profit maximisation.

Big Society Capital (BSC) was another in a series of such UK initiatives. Commencing in 2012, it was funded by the commercial banks (£200m), and received an initial allocation of £400m from unclaimed assets in the “dormant accounts” of UK banks. It may invest the £600m subject to certain criteria, but I would argue its overriding mission is to build the impact investment market in the UK, which governments of all stripes have considered to be in the best interests of the UK. In my view* it has been the most significant development in the UK impact investment market.

Some time ago, in a public meeting, I asked the then new Minister for Civil Society, Rob Wilson MP, if he expected to consider BSC becoming wholly privately-owned given that the GIB was in the process of being sold off, and also whether the new May administration was less committed to impact investment. His reply was not altogether clear, but observers should note that there is form for UK governments to get excited about some new concept or initiative, establish a vehicle to finance it, support it and then sell it. This is all part of impact investing (and early stage investing, and renewables investing and investing in developing markets) becoming part of the mainstream—a trend which all of us at ClearlySo strongly support.

To me, it’s not a development to moan about or feel sad about, but part of a process of moving markets onward, in a way that benefits society. Were BSC to become wholly privately-owned (and I have no reason to think this is imminent or even planned) it would be an event which would mark a new stage in impact becoming closer to the mainstream—a next step in an unfolding process.

And just as a footnote, it is interesting that BSC’s first CEO has just been appointed CEO of CDC!

*In the interest of transparency, please note that BSC has an equity investment in ClearlySo of circa 9% and also has some £600k+ of debt outstanding to the company.

At the end of August, we learned that the EU ordered Apple to pay a record EU13 billion in back taxes, as it determined that deals with the Irish Government allowing the US company to avoid taxes were illegal. This follows on from EU decisions in October to charge both Starbucks and Fiat EU30 million each, which it claimed was payable to the Governments of the Netherlands and Luxembourg, respectively, utilising similar arguments. Both Apple (unsurprisingly) and the Irish Government were expected to challenge the decision, but it raised the stakes in an ongoing battle over fair taxation.

Interestingly I have not found that anyone is claiming that any of these firms engaged in criminal activity. It seems to be accepted that all three operated within the law, but the law has been judged to have been unfair, or unfairly applied. I am certainly no expert on such technical issues, but this struck me as an interesting development—especially given the amounts involved and the high profile nature of these companies. The EU was stepping in and exercising its authority over national governments to strike deals. One wonders about the January 2016 deal struck between Google and the UK’s HMRC, wherein Google agreed to a settlement of £130m for past tax liabilities.

In any event, a related news item caught my attention yesterday. On the front page of yesterday’s Fund Management section of the Financial Times it was reported that Legal & General Investment Management, the Local Authority Pension Fund Forum (representing 71 public pension funds), Royal London Asset Management and Sarasin Partners signed a letter to Eric Schmidt, (the Chairman of Alphabet, Google’s parent company) which raised concerns about the company’s tax arrangements. What was interesting was that the letter did not challenge the legality of such arrangements or ask if avoidance (which is legal, as opposed to evasion, which is not) was being practised, but if the Chair had “…properly considered the implications for brand value and your license to operate in society”.

This seemed eye-opening to me. A group of investors was questioning the wisdom of arrangements which, though perfectly legal, might put the company’s “license to operate” at risk. With a market capitalisation of well over $500 billion, these investors see a great deal at stake in any challenge to this license, and have calculated (without too much sweat, I imagine) that what is at risk greatly exceeds the few billions of taxes that might need to be paid.

Companies involved may see this as an unfair “shifting of the goal posts”, and in one sense it very much is. What has shifted is the willingness of society to allow large and successful companies to avoid paying the taxes societies deem to be fair. Where national governments have been reluctant to act, often beholden to powerful international firms, supranational organisations (like the EU) or groups of shareholders are beginning to take action. They are doing so implicitly at the behest of outraged citizens, perhaps even in part to avoid circumstances where these same citizens wind up taking direct action to vent their rage, for example, by possibly boycotting of the products of companies whose tax policies are deemed overly aggressive. This would constitute an effective termination of such a firm’s “license to operate”, but one that would be enforced by the power of the marketplace and not via governmental regulation, as is normally the case.

Up until this point we have argued that the increasingly important third dimension to investing (impact, instead of just financial return and risk), which underpinned the development of impact investing, was predominantly a reflection of externalities, where hidden costs or benefits to society bubble up to the surface. Where companies use completely legal means to avoid paying taxes but free-ride on the economy available to all has not been something we considered as part of this equation previously, and it certainly did not seem on the agenda of investors, whom it was felt implicitly encouraged minimising taxes paid. It now seems we should, and will. Times are most definitely changing………

On face value, the decision to move the Office for Civil Society from the Cabinet Office and into the Department for Culture, Media and Sport is a bit puzzling. Which bit includes us? Are we part of culture, media, or sport? It is hard to say but, in this regard, government is similar to the corporate sector. Things and people have to report to somebody, somewhere and cannot expect what they do to be in the title of the division. Secondly, Karen Bradley, the new Culture Secretary, might turn out to be terrific. At this point, one simply has no way to judge.

From what I have read, the charity and social enterprise sectors are in uproar. about the move. I suppose some of the consternation stems from the fact that we were very much the darling of government, and now feel, well, a bit jilted. Three successive governments (Labour, the coalition and the Conservatives under David Cameron) devoted a great deal of attention to the third sector and impact investment.

For Cameron, this was one of the centrepieces of his big society programme and seen as a critical path in delivering positive social outcomes in fiscally constrained times. Our sector has been subsequently subsidised, championed and the subject of unrelenting ministerial love. This was capped off in making our area a centrepiece of the recent G8 summit in London a few years ago. The global social impact investment task force sprung out of this and its work continues.

But this highlights the risk of too close an alignment to any political party or individual. When they are replaced, as is inevitable, the factors that brought the sector into favour will work in reverse. What is clear is that the new Prime Minister, Theresa May, is establishing her own legacy and those programmes that are seen as ideologically close to her predecessor might be in jeopardy.

What many fear is that the largesse that has been lavished upon the sector will cease. I do not speak here of the charitable sector, which is potentially facing a serious crisis and in which I have very limited expertise, but the impact investment sector.

For the impact investment sector, I have some reservations, which I have expressed publicly, about the extent of subsidy we receive and its distortive implications. In a number of programmes, I observed it driving behaviour and not facilitating it — an important difference. I have also been a long-standing critic of tax credits for impact investment, believing them inappropriate at a time of severe fiscal constraint, especially as they predominantly benefit the wealthy.

I do, however, see a silver lining for the sector; one which stems from my deep-seated belief that impact investment and the values-driven enterprises it supports stand on their own merits. High-impact enterprises can benefit from lower cost of labour and capital, higher prices for their products and high visibility. They generate substantial positive externalities which governments, one way or the other, are going to need to pay for, and increasingly will pay for as commissioning shifts to outcomes-based systems. Investors, corporations, and consumers value the positive impacts these enterprises generate and this is increasingly being incorporated into their investment and purchasing decisions. Maybe now impact investment and social innovation will flourish, not as a pampered child but as a great idea whose time has come.

I voted “Remain” and felt absolutely right to have done so. I felt it was right for Britain and that British membership would help ensure the EU survived—this is now threatened and I am concerned about the consequences of the political entropy, which has begun.

Had roughly 650,000 voters shifted, the result would have been different, a swing of 1.9%. That 51.9% voted to leave is hardly an overwhelming mandate. What if there had not been so much rain on the day? What if Jeremy Corbyn had actually tried? What if EU citizens living (for a long time) in the UK had been allowed to vote? What if it did not coincide with Glastonbury? On such small matters often hang the fate of nations—never has this been more true.

Nevertheless, the nation has voted, the rules were clear, the date was known (oddly right in the middle of Euro 2016) for a long time. What if the home nations had not fared so well? What if England were thrown out because its fans behaved idiotically? We can conjecture all we want. What is done is done.

To those petitioning for a second referendum I say the following:

The first was unnecessary—how can we possibly justify a second?

How would we feel if Remain won the referendum and the Leave supporters signed the same petition?

If we cared so much to ensure an emphatic majority, why did we not argue for this in advance, when we seemed to be massively in the lead?

What if we re-run the campaign and Leave wins? What if the result again is close? Do we keep doing this until we get the “right” result? What disdain would this not show for the democratic processes we hold so dear?

I do not think we should have held the first referendum, I certainly do not think we should have another. We lost and the turnout was over 72%. It is time to face the future and make of it what we can.

The Campaign

The run-up to the vote was appalling, with insincerity, cynicism and negativity in abundance. However, let us be fair—our campaign was worse. Having scared Scotland into backing union, and frightened voters out of voting Labour (remember claims that the Labour Party would be “in hock” to Nicola Sturgeon) Cameron felt he should again deploy his fear tactics—this time he failed miserably. Cameron and Osborne not only lost a vote we should never have had, but they lost it in a bad way. Had they run a principled, positive campaign they might have actually won—many voters I know voted Leave BECAUSE of the Remain campaign. So Cameron’s legacy is rightly discredited. He made a selfish and cowardly decision to call the vote in the first place, he ran a cynical and negative campaign and he lost—that most unforgivable triumvirate of political sins. Good riddance.

The Leave campaign did also appeal to our basest instincts, with Farage’s poster only the best known of the worst examples of this. There were racist undertones to much of the Leave campaign, but this was not the entire summary of the Leave argument and accusations of widespread racism are completely out of hand. Furthermore, to advocate a case for measured immigration or controls on refugees allowed into the UK is a perfectly respectable position. In the same way that not all critics of Israel are anti-Semites, not all those concerned about immigration are crude xenophobic bigots.

At least, politicians who were genuine and longstanding Euro-sceptics fronted the Leave campaign. Apart from the more Europhilic and opportunistic ex-mayor, one absolutely cannot accuse Farage, Gove or IDS of inconsistency—at least on Europe. That Osborne and Cameron (and Corbyn) led the argument to Remain was simply not credible. Their position lacked passion because frankly, there was none—the electorate saw easily through this paper-thin curtain. One never felt that those on the Remain side cared quite as much.

The Vote

To anyone who stayed up until the wee hours, the result and its message was clear. One could describe it as Hartlepool vs. Islington, or Boston vs. Barnes, or any other combination pitting the losers and winners of globalisation and its effects against one another. That the likely recession will likely inflict more hardship on the less well off than those comfortably enjoying a leafy, liberal London existence was ignored as the less economically fortunate voted in overwhelming numbers to leave. It’s true that Scotland (overwhelmingly) and Northern Ireland (marginally) also voted to remain, but these are particular cases. It was wealthy, multi-cultural London against the more fearful and increasingly hopeless elsewhere.

Those who voted to Leave may suffer negative economic consequences, but the sense was that they felt they were going to suffer anyway. Governments of all stripes have largely ignored them, and the promises of the current Government, which led the Remain campaign, rang hollow with those who have been suffering from this Government’s policies. This was their only chance to express their anger and they took it. They are not all racists, xenophobes, ignoramuses or vindictive old people – they are afraid, and perhaps rightly so. Even if we do not agree with their point of view, we must come to understand it.

We would not have lost confidence in this Government and its predecessor if it had not sought to balance the books on the backs of those least able to afford it and alternatively extracted sacrifices from those best able to afford it. Instead, it cut marginal tax rates. The Coalition Government spent billions bailing out the banks due to their mortgage losses – they could have bailed out homeowners. I could go on. The indifference was palpable and has been worsening under this Tory majority Government, whose legislative agenda was becoming increasingly right wing and doctrinaire.

In addition, let me not let Europe’s leaders off the hook. Across the continent, citizens of all EU member states have been restless regarding the EU’s performance and critical of its flaws. If its leaders had demonstrated courage instead of political calculation and engagement instead of being aloof, they would not today be confronting their own potential extinction, which the UK Brexit vote has made far more likely. I understand their (EU officials) resentment, anger and fear, but unlike the unemployed in Athens, Madrid and Hartlepool, their inaction and callous indifference has brought it upon themselves.

The Future

I am really sad that the Remain campaign has lost the Brexit vote. I have argued that Britain should stay in the EU and have been a longstanding supporter of the European model. That does not mean I have been an uncritical supporter. For example, I have always opposed a single European currency as well as Britain’s participation in it – this even as a Lib Dem Parliamentary candidate in the 1997 General Election. It was, at best, premature, at worst, a stupid idea and yet another example of the conceit of politicians (Kohl and Mitterand, as I recall, in this case) over-shadowing the sensible interests of citizens. I always felt, and still feel, it would destroy the European Union.

Anyway, my side lost the Brexit battle and now we all need to move on. What is apparent to me is that this vote will be a powerful catalyst for change. Even though I would have preferred it, a vote to Remain would have encouraged politicians to do nothing. Safely embedded in the status quo they would have congratulated themselves on their accomplishments, welcomed the good sense of the country in supporting their point of view and carried on much as before. Nothing will have changed – this is no longer an option.

I am curious indeed, how a UK Government led by Johnson (or maybe May), Gove, Redwood, David Davies, and the like will deliver to those in Hartlepool who supported their position. The idea that the farthest right wing of the Conservative Party becomes the champion of the downtrodden feels unlikely, but I have seen stranger twists of fate, and if they can deliver, I will cheer.

I take comfort in the fact that in Britain, our far right consists of people like Gove, Davies and even Farage, and are not Norbert Hofer (who nearly became President of Austria) or Marine Le Pen in France. This is something to be very thankful for.

On the other hand, in the highly probable scenario that these Conservatives fail to deliver for the disenfranchised, we need to find a new leader on the left – someone who can speak to the fears of the fearful and address the aspirations of our nation’s youth, who are despondent at the outcome of Thursday’s vote.

It is encouraging that Jeremy Corbyn looks set to be deposed. He seems a decent principled man, but he strikes me as an incompetent leader. By definition, and despite his democratic mandate, if he cannot carry his colleagues in a Parliamentary system of Government he just has to go. I expect a safe and unimaginative choice but I am hopeful for the best (I am an eternal optimist).

Caroline Lucas is the UK politician I most admire and is the single person with the most credibility to galvanise our country. However, she is a member of a disorganised party, and, much as I hate to admit it, politics, to be effective, requires a certain ruthlessness that the UK seem unable to muster. I am not proposing Blairish deviousness, but would welcome, at least, some Clintonesque pragmatism (that of the Bill variety, not Hillary!)

So what can we do in the meantime?

I rarely want to wait for politicians to lead. My experience has taught me that this can be very disappointing. In a democracy, which sits alongside a capitalist economic system, we have seen how policy is dramatically tilted in favour of the better off, and are coming to feel some of the consequences of this (e.g. the financial crash, Greece, Brexit). This will continue until we address the systemic problems). What shall we do in the meantime?

A friend of mine rang me on Saturday morning and said — “I just woke up this morning and felt like I want to/have to do something.” She was utterly distressed, like many others, about the outcome and felt she needed to undertake positive action – for herself and for the greater good of the nation.

I think she will. All across the country, people are waking up this weekend with a sense of, ”oh shit, this really happened—it was not just a bad dream.” Some will retreat into themselves. Some will argue about the results and challenge them – with petitions or other blocking actions. Some will escape, if they are able, to Canada, Norway, wherever. However, some like my friend realise that this is the time for real action. The days of kicking problems into the long grass have ended.

The vote has robbed us all of the ability to keep smiling and pretend things are OK. Things are not OK and the Brexit vote is forcing us to deal with thorny issues like immigration, inequality, the bankruptcy of Greece, serious strains in the Euro-financial system (in Italy, France and Portugal, just for example), weak financial institutions, an agitated and mischievous Russia and much, much more.

As ever, the only question any of us can answer is, “what am I going to do about it?”

Over the last few years at ClearlySo we have been travelling regularly to continental Europe as part of what we do. We have done business on the continent, and have also used these trips to learn about new innovations in impact investment (such as SIINCs from Germany and “90/10 funds” from France) and to identify financial institutions with a developing interest in impact investment. We believe that accessing new pools of capital is of great benefit to our entrepreneurial and impact fund clients looking for investment.

Sweden as a country seemed promising. It is liberal (small “L”), progressive and open to new ways of thinking. In addition, the positive and non-adversarial relationships between business, finance and the government have made Sweden a role model to which other countries aspire. One recent development in this regard is the introduction of a six-hour workday throughout Sweden. This is intended to make Swedes happier, but in a particularly Swedish twist, experts there also believe it will make Sweden more productive. It is already one of the most productive in Europe: in 2014, per capita GDP was $45,143, significantly higher than the UK ($39,136). This is despite the fact that people in the UK worked 4% more hours each year.

Given such an open-minded, progressive approach, I felt confident that impact investment would be surging in Sweden. Sadly this appears not to be the case, based upon conversations I’ve had with experts. There seem to be few high impact entrepreneurs, at best one or two impact investment funds, very little government involvement and near zero involvement from the mainstream financial sector (although this is true of the UK mainstream as well).

This surprised me. However according to the experts I met, while Swedes are intellectually open to new ideas, they are actually relatively conservative (small “C”) in terms of implementing them. Swedish society already works rather well, and there is a reluctance to tamper. People earn high incomes, income disparity is well below UK/US levels, and taxes are higher, but the public expects and receives much higher quality social services than other European countries. This is in fact part of the problem for impact investment in Sweden: although Swedes cite all sorts of social problems, in fact, the Swedish social compact operates relatively well.

There are also two deep-seated beliefs I encountered which act against impact investing or even philanthropy. First, there is genuine suspicion of mixing the profit motive with social outcomes. I would not describe it as closed-mindedness, but just a wariness of this very Anglo-Saxon idea. This is then amplified by a particularly Swedish aversion to charitable giving. According to the Charities Aid Foundation (2012) Swedes gave 0.16% of GDP to charity. This compares with 0.54% in the UK and 1.44% in the USA. It is in Sweden where we see the clearest distinction between the Anglo-Saxon model of earning/giving and its model of using taxation to fund social welfare expenditure.

Such an environment is not particularly fertile soil for high-impact enterprises or impact investment in general. In fact, along my European journeys, I found that troubled economies were more hospitable to the necessary innovations (maybe out of desperation). In 2007 I journeyed to 10 Balkan countries and found flourishing innovations in places like Serbia and Bosnia as individuals grappled with deeply troubled societies in the aftermath of a brutal civil war.

I know very few Europeans who would trade places with Sweden as a successful economic model. On a recent trip to Stockholm, any slight disappointment I felt in Sweden’s current approach to impact investing was overwhelmed by the beautiful weather, celebrations of Walpurgis Night, May Day and the 70th birthday of King Carl Gustav. Stockholm is very close to paradise on earth. Nevertheless, this is not to say that Sweden is a lost cause from an impact investment perspective – the banks do, for example, raise money for overseas projects (most notably through microfinance). Once Sweden has considered the model and made it relevant to their domestic needs, I have no doubt that impact investment will eventually flourish in Sweden.

Recently ClearlySo has seen a flurry of environmentally related deals. A couple of weeks ago we helped the firm Upside Energy to close an investment round of £545k. Upside Energy creates a Virtual Energy Store™ by aggregating unused energy from devices owned by households and small business sites that inherently store energy, to sell balancing services to grid operators which helps reduce the need to turn on the older, most polluting and expensive power stations during peak demand times More recently we supported the fundraising of a company called Switchee. Switchee’s product reduces energy usage which saves tenants in affordable housing money on their utility bills, and the data helps social landlords better manage damp, maintenance and repairs in their properties, thereby fighting fuel poverty. These two transactions, previous deals closed and several in the pipeline have coincided with Earth Day, which took place on 22 April. Earth Day is often credited for launching the modern environmental movement. My ClearlySo colleague Lindsay Smart has written an extensive blog piece in honour of Earth Day.

This juxtaposition of events comes at a very interesting time in the UK impact investment space. For reasons that are hard to explain, and even if I could would lie well beyond the word limit of this column, the “mainstream” UK impact investment community and environmental investment community has always remained separate and aloof from one another. For us at ClearlySo this is rather bizarre. Many of our investor clients seem to care a great deal about environmental matters. These include water pollution, air pollution, global warming, sustainable fishing and forestry and a host of other related issues, which impact all of us. Also, matters environmental have always had a disproportionately negative social impact on the world’s poorest—so the social and environmental impact spheres are closely linked. To say this isn’t really part of the impact investment movement is not only odd but self-defeating, particularly as this represents a considerable portion of available investment opportunities. Moreover, the metrics for understanding environmental impacts are more highly developed, better understood and more widely utilised at the present time. It seems rather arbitrary to push the environment to the impact investment side-lines. Our view has been that if investors value particular impacts, so do we.

Some of this may be institutional in nature. Environmentally conscious investing came onto the scene prior to what we now describe as impact investing and perhaps there was little interest in embracing this new movement. Similarly the Green Investment Bank was launched well before Big Society Capital, which was the impact investment sector’s broadly equivalent institution. Thus a central government initiated split of sorts may have been created. The apparent assault by this Conservative Government on many aspects of renewable energy funding, in contrast to its persistent praise of impact investment has also furthered this divide.

Nevertheless, we will continue to argue that these two activities are part of a much bigger single picture. It is reminiscent of what we always saw as flawed thinking, that impact investment is an asset class, perhaps cleantech investment is another and maybe micro-finance and social housing are a third and fourth. In our view those are merely different facets of a world where impact is becoming important in all investing. We see the world shifting from investing in a two-dimensional way, where only risk and return are measured and considered, to a world we have long advocated of 3-D or three-dimensional investment. It is bringing impact to all investment that is our true mission.

At ClearlySo we have never been very enamoured of SIBs. They have always seemed an expensive and labour-intensive instrument, and not of good value to our clients, which is the fundamental test.

On the other hand they have been very intensively supported by government and leading players in the impact investment space. To some extent this proves the point about their lack of fundamental appeal. Surely an innovation so intensively supported would have progressed much more rapidly by this point.

This in no way undermines the monumental contribution they have made to how we think about the possibilities in impact investment. One breakthrough of SIBs, much to the credit of their creator, Social Finance, is that they secured payment by governments to investors based on social impacts achieved. This was an amazing accomplishment.

Fundamentally the problem that needs addressing is one of externalities. When enterprises generate high social impact as a by-product of what they do, society benefits. These benefits could be in the form of governmental expenditure which will no longer be necessary or things we simply enjoy for free, such as clean drinking water. The challenge has been how to capture the benefits of those positive externalities.

SIBs are a complicated way of achieving this, because they require a set of agreements between commissioners, investors, providers, impact verifiers and potentially others along the way. Securing agreement by so many parties is difficult and time-consuming. There are also fees at several levels. We have consistently argued for using the tax code to “tilt” in favour of enterprises generating positive social externalities as a more efficient mechanism. Such arguments have hitherto fallen on deaf ears.

Social Impact Incentives (SIINCs) are a positive innovation and a logical next step beyond SIBs. Originated by Roots of Impact, a German organisation, SIINCs have been developed in cooperation with the Swiss Agency for Development & Cooperation with a test on high impact enterprises in Latin America. In simple terms, a direct payment is made by an organisation such as a foundation or development agency (“outcomes payer”) to an organisation generating social impact. The need for an independent verifier of outcomes/impact on customers/beneficiaries remains but this is the only necessary complexity. Roots of Impact argue in a recent paper that the SIINC model is highly flexible and adaptable and doesn’t require any agreement except from the outcome payer and the enterprise. The payment increases the revenues of the enterprise and therefore the profitability of the enterprise is enhanced. Even an agreement with the investor may therefore prove unnecessary, and in any event can be quite a separate/unlinked discussion.

The brilliance of the SIINC model is that it facilitates payments by those who care about positive externalities directly to the enterprise thereby changing their business model. This is a simple, straightforward bilateral agreement, which addresses the inherent complexity of SIBs. The added cost for an independent verifier of impact should be more than offset by the cost savings achieved to governments, for example. As more positive externalities are captured this way capital markets will adapt to the new (payments-enhanced) business models of these high impact enterprises.

SIINCs are a brilliant innovation, a next step in the thinking prompted by SIBs and I congratulate Bjoern Struwer, Christina Moehrle and Rory Tews (all from Roots of Impact) in conceiving this innovation.

My only concern is that as a non-Anglo-Saxon innovation it will fail to get the attention it deserves.

Much is written about the UK’s leadership in the impact investment field – indeed, I have on many occasions mentioned this and spoken of the need to “maintain this lead”, “protect our dominance” and so on. This is not nationalism but self-interest. As ClearlySo is one of the leading UK-based intermediaries operating solely in impact investment, we have a great deal riding on UK leadership.

Progress in the UK does continue, due largely to government-backed initiatives and the rapid entry of angel investors. To this is added the sometimes grudging/sometimes enthusiastic participation of large corporations and financial institutions. This all creates progress and growth – about which we are delighted. On the other hand, I sometimes fear that this leadership verges on arrogance, exacerbated by the fundamental advantage which comes from English being the global language of impact investing.

This linguistic dilemma was again manifest when the G8 Social Investment Taskforce reports were released; both the German and French versions were released and then promptly ignored by many of us Anglo Saxons whose language skills are not up to deciphering these documents. They were subsequently released with English translations – what is clear is that the French, in particular, have been quietly making enormous progress.

The most eye-catching figure is that the size of the French market is estimated to be approximately €1.8 billion. This compares with published figures for the UK of a few hundred million pounds. Even when I adjust for the different approaches in calculating the two figures, there is only one conclusion to reach – the French market is larger. In terms of structural flexibility and pure innovation, the British market is probably still well ahead, but it is smaller.

Both have a large, state-initiated catalyst – Big Society Capital in the UK and Banque Publique d’Investissements in France (with €500m). The French also have a very large ethical bank, Credit Cooperatif, which unlike the troubled Co-op Bank in the UK, has remained profitable, successful and cooperatively-owned. But the main difference is the active engagement of the country’s large mainstream financial institutions.

Nearly all have actively-managed impact funds; their sums exceed €300m. Much of this is due to the widely-known “90/10” funds, where 90% is invested conventionally, and 10% in strictly defined enterprise sociale. Banks are required to offer these products to individual customers and the uptake has been impressive. Even on the institutional side there has been progress, without state intervention. AXA Investment Managers created an €200m Impact fund of funds, and reports are that this innovation has generated considerable third party client interest (disclosure: I was on its Board from 2004-2010).

I am not intending to establish the basis for an inferiority complex or pander to nationalistic instincts. The point is rather that we all have a great deal to learn from other countries. As each nation develops its own path for creating markets where social impact becomes a third dimension to investing, there is no basis for arrogance.

I am reminded of a trip I made to Ontario for the first “Toronto Social Entrepreneurship Summit”. One was made to believe the Canadian impact investment market was just about to be created there in the province of Ontario. Later that trip, I journeyed to the province of Quebec and found it had been going on for decades. They just didn’t talk about it as much and few Anglo Saxons read their French papers on the subject.

My inbox is overflowing with analysis of last week’s budget and its benefits for the impact investment sector—in particular plans to create a Social Impact VCT (SIVCT). Following the announcement, the sector praised the Chancellor for these proposals, which are only the most recent of many which this Government and its predecessor have implemented since the early noughties. The first was Community Investment Tax Relief (CITR), originally proposed by the Social Investment Task Force (SITF) but the pace of goodies just keeps flowing. Social Investment Tax Relief felt like it was proposed just yesterday—my records show it was first floated in early 2013 and implemented last summer.

It is great for the impact investment sector to be getting so much attention. One cannot doubt the goodwill of politicians in levelling the playing field with the mainstream, and all these initiatives create a favourable back-drop for those of us involved in intermediating capital to organisations which generate high social impact. This is indisputably helpful in our conversations at ClearlySo with the HNWIs at the core of our angel investment activity.

But I warn against expectations that this will bring about a sudden boom. Observers who wish the sector to grow faster (frankly, I think it is growing pretty fast already), or who think such funds will solve a meaningful portion of the social problems facing British society today will be disappointed.

I have read many studies which summarise investor’s views that tax credits would encourage them to invest in a particular way, but little evidence that they actually do. They lower the cost of investment for the wealthy with available liquid assets, but I contend they rarely change the amounts invested.

Perhaps we should consider, by example, what the VCT instrument has done for UK venture capital investing, which seems the most appropriate comparator for the SIVCT. VCTs were introduced in 1995 to encourage entrepreneurialism in Britain and made far more attractive in subsequent years. During this time most venture funds have performed abysmally (based on BVCA data). In fact, they seemed to have turned negative right after the launch of VCTs! One might not want to suggest causality, but there is an argument that the new fund inflows might only have inflated prices, thereby depressing returns. During this period venture leaders such as 3i and Apax Partners left and drifted into much larger deals. VCTs have thus not transformed the venture VC industry—and they will not transform impact investing.

If tax credits are not the answer, what might be? Perhaps an analysis of the five original recommendations of the SITF provides some guidance. CITR (a tax credit) has been disappointing. Disclosure by banks and greater latitude for foundations has had practically no impact. CDFIs are progressing patchily but only with a large subsidy. The sole big win was Bridges Ventures, now a thriving impact investments firm—the beneficiary of the recommendation to “set up Community Development Venture Funds”. The Government invested £20m (half the fund) on a first loss/capped return basis! This meant the fund could lose half its value before investors suffered any loss and was critical in getting early support for this novel concept. Bridges has since thrived.

So enough of tax credits which are unlikely to draw in more capital. Money for first-loss guarantees will cost less and be far more effective in galvanising the sector because it deals with the key issue investors really face—the perception of high risk due to the novelty of impact funds.